Mexico's Tech Boom: Fueling the Future of Nearshoring

Fueled in part by nearshoring, the technology sector in Mexico has become an area of explosive growth in recent years, with an average yearly growth rate of 10.5% from 2002 to 2018. This progress has been accompanied by a significant boost in exports, indicating a strong connection to international markets.

Despite being in its infancy, the venture capital market in Mexico is making substantial progress in supporting the development of many key Mexican startups. Due to its manufacturing-centric economy, proximity to the U.S. market with 62 million Latinos, and serving as a gateway to expanding Latin American markets with an evolving middle class, Mexico presents an ideal environment for bolstering innovation.

Technology Clusters in Mexico

In addition to industrial hubs in Mexico that consistently produce engineering talent for the manufacturing industry, there are clusters of Mexico's IT industry and talent that are a driving force for nearshoring. Mexican government policies and modernization efforts have played a significant role in shaping the country's R&D ecosystem. In the early 2000s, the Program for the Development of the Software and Computing Industry (Prosoft) was launched in Mexico with the intent to boost R&D and technical training in IT to enhance Mexico's global competitiveness in the tech industry.

Following this, Mexico introduced several other supportive measures for R&D, including attractive tax incentives for R&D projects, programs encouraging research collaboration between academia and industry, and funding opportunities for innovative projects.

The demand for IT roles in Mexico (and globally) is on the rise as more manufacturing processes are fused with technology, the need for digital security grows, and the surge in mobile app usage due to increased accessibility to mobile technologies. This industry holds boundless potential, and the growing interest of many companies in becoming more agile has further boosted the demand for these roles as close as possible to production or the final consumers, like the drive for nearshoring operations.

U.S.-Mexico Border

Tijuana and Mexicali make up an important manufacturing hub for various industries such as aerospace, medical devices, biotechnology, automobiles, and electronic equipment. The region also excels in agro-industry, particularly in wine and berries. Manufacturing companies are mainly located in industrial parks near the border, catering to the export market. The presence of industrial clusters housing major US and international companies offers an opportunity to collaborate with entrepreneurs for the development of technologies and services that can enhance value-added production. Notable companies taking advantage of this ecosystem include Samsung, Honeywell, Plantronics, Thermo Fisher, Skyworks, and more.

Manufacturing activity in Ciudad Juarez and Chihuahua is diverse, with a focus on various sectors such as communications equipment, disposable medical materials, electrical and electronic equipment for motor vehicles, measuring and control instruments, interior accessories for motor vehicles, computers, electrical and electronic components, and non-electronic medical equipment. The city is also increasing its capacity for advanced R&D, often in collaboration with universities and research centers in El Paso, Texas. The presence of cross-border manufacturing indicates a strong infrastructure for binational innovation, aiming for high-value production and efficiencies.

Monterrey and Saltillo serve as important centers for private businesses and are home to a significant number of Mexico's largest companies. The Monterrey metropolitan area is the headquarters for prominent corporations like CEMEX, Banorte, Banregio, FEMSA, Gamesa, and OXXO. In addition, multinational companies such as Boeing, Caterpillar, Dell, GE, Mercedes-Benz, Philips, and Siemens have established significant operations there. The city's leading universities provide a skilled workforce that fuels corporate investment. Key industries in Monterrey include nanotechnology, biotechnology, aeronautics, medical services, automobiles, home appliances, IT and software, multimedia, transport and logistics, agribusiness, energy, and tourism. The Monterrey metropolitan area is responsible for approximately 10% of Mexico's IT companies. US technology companies often look to Monterrey to tap into its pool of talented engineers.

Central Mexico

In Central Mexico, there is a region known as Bajio. Its economy is primarily driven by the automotive and aerospace industries, as well as agrifoods, chemical products, plastics, and metal products. The automotive sector includes major OEM plants and numerous parts suppliers that serve global leaders such as General Motors, Nissan, Volkswagen, Ford, Kia, Honda, Toyota, Infiniti, BMW, and Daimler, mainly located in Guanajuato state. The region employs around 300,000 people in the automotive industry. Over the past 25 years, the manufacturing economy of Querétaro state has shifted from consumer goods to a focus on automotive, aerospace, IT, and OEM sectors. Queretaro is ranked fourth globally for aerospace foreign direct investment and is home to more than 25 data centers, including operations of Axtel, Huawei, and Microsoft. Aguascalientes state has successfully attracted major IT firms such as Softtek, Semtech, iTexico, Capgemini, Tech Mahindra, and Texas Instruments, which contribute to the growing IT sector. The majority of IT companies in the region serve foreign clients in the insurance, e-commerce, banking, and healthcare industries using a nearshore model.

Financial and business services, information and media, and manufacturing are the leading sectors driving business activity in Mexico City. The city is home to twelve of Mexico's fifteen largest companies, with a strong emphasis on commerce and state-owned enterprises. The presence of numerous universities contributes to the city's research and innovation capacity, attracting a talented workforce. In fact, Mexico City and the State of Mexico ranked first and third respectively in 2019 for the number of registered researchers. Due to its size, market potential, abundant resources, and proximity to the national government, Mexico City is a magnet for overseas businesses, including startups. From 2014 to 2019, the city experienced significant growth in startup activity, resulting in a surge in employment opportunities. Notable startups in the region, such as Kavak, Konfio, Clip, and Facturama, are primarily focused on e-commerce and digital payments.

Eastern Mexico

Guadalajara, located in the state of Jalisco, holds the fourth largest GDP among federal entities in Mexico. Its economy is primarily driven by manufacturing, with a thriving IT sector that accounts for 40% of the country's IT industry. The city excels in areas such as electronics, telecommunications, automobiles, aerospace, and medical devices. Software development, software services, and business process outsourcing (BPO) are the prominent fields within the IT sector. With its technological advancements, Guadalajara has become Mexico's hub for high-tech industries, attracting global technology companies like Bosch, Flex, Foxconn, Sanmina, AstraZeneca, HCL, Tata, Cognizant, Honda, and NXP Semiconductors. Over 1,000 high-tech companies operate in Guadalajara, providing 150,000 jobs. The city boasts significant clusters in technology, e-commerce, financial services, healthcare, and transportation. The city's innovation ecosystem is further enriched by a growing number of startups, including several with dual headquarters in Silicon Valley.

Southern Mexico

Located at the northern tip of the Yucatán Peninsula, the state of Yucatán is a well-known tourist destination. Its capital city, Mérida, is one of the oldest cities in North America. While the economy of the state relies heavily on tourism and agribusiness, Mérida is making strides in the field of information technology. With a strong educational foundation and a thriving artistic and creative community, the city has established itself as a hub for IT services. Currently, there are around 20 medium-sized IT companies in Mérida. Although Mérida's startup scene is relatively small, it shows great promise due to the city's assets and supportive policies implemented by the Yucatán government and business community. These factors have created a positive business environment with a technological edge. One of the state's key priorities is the development of Mérida as a "smart city," and Cisco has played a role in supporting this vision by assisting in the establishment of an integrated digital administration and improving digital access for the city's residents.

Nearshoring's Tech Service Boom

The nearshoring boom in Mexico presents a major opportunity for service providers, particularly those looking to increase their ability to market and promote their services close to home. Companies can take advantage of the proximity of the two countries by providing services like logistics, maintenance/repair, testing, inspections, research, automation, engineering, training, coatings application, software, installation, etc.

In addition to the nearshoring opportunities, there are many reasons why the the services sector is poised for growth.

Service Sector Growth

• The close proximity decreases asset transportation costs, travel time, time zone parity and ultimately reduces business disruption for companies with cross-border operations. This allows for closer oversight to facilitate knowledge transfer, and integration into teams focused on agile operations.
• Mexico's economy is diversified, with strengths in consumer business, retail, manufacturing, technology, and finance. It has been shaped from years of foreign direct investment from the United States and Canada, as well as other high-performing economies.
• Mexico’s workforce is another competitive advantage. Mexico has an educated workforce, with high secondary and graduate education levels, particularly in technical fields. Many professionals are previously trained in international systems and software. The Mexican labor pool has descent English skills, particularly in the northern bordering states, yet commands lower wages than other Latin American markets with similar talent profiles.
• There is a fairly high level of English skills among professional workforce in the large multi-national sector. Additionally, the second most popular spoken language in the U.S. is Spanish. This creates a value-add for service companies that serve Hispanic markets in the region as well as the Americas.

As nearshored operations continue to come on line in Mexico, there will be an increased need in industrial services and value-add as supply chains continue to regionalize. Additionally, there are great benefits in services for a U.S. domestic market, delivered from Mexico. Jobs that stay in the North America benefit the region. In fact, 40 cents of every dollar of Mexican export into the United States, whether goods or services, benefits the United States. Mexican jobs directly create U.S. jobs, through upstream or downstream supply chains, software and technology, financial services, web services, etc. The same cannot be said for jobs in other regions of the world.

USMCA: Digital Trade & IP Protection

The USMCA agreement includes a first-of-its-kind chapter on digital trade that contains the strongest commitment of any international agreement to date. This chapter protects international data transfers, prohibits customs duties on electronic products, prescribes the use of electronic authentication, addresses cybersecurity challenges, and enhances customer protections, among others. Mexico undertook significant legislative reforms to implement its intellectual property commitments for compliance under the USMCA.

Additionally, under the USMCA, there are specific provisions related to intellectual property protection, including patents, trademarks, copyrights and trade secrets. These provisions aim to promote innovation and encourage R&D activities by providing a framework for the protection and enforcement of intellectual property rights across the three countries.

Conclusion

Mexico's tech sector is booming, fueled by nearshoring and government support. This growth presents a golden opportunity for service providers across various industries.

Key Takeaways:

• Nearshoring Boom: Mexico's proximity to the U.S. and skilled workforce make it an ideal location for nearshoring. This creates a demand for service providers like logistics, R&D, software, and engineering, among others.
• Tech Hubs Emerge: Clusters like Monterrey, Tijuana, Juarez, and Guadalajara are thriving with IT talent, R&D initiatives, and major tech companies.
• Competitive Advantages: Mexico boasts a well-educated workforce, lower wages compared to other skilled markets, and strong bilingual capabilities - an advantage for serving U.S. companies.
  
  

The Future is Bright. The USMCA agreement reinforces digital trade and IP protection, further strengthening Mexico's position as a tech partner. With nearshoring on the rise, the future of Mexico's service sector is bright.